BILL ANALYSIS �
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Ed Hernandez, O.D., Chair
BILL NO: SB 728
S
AUTHOR: Hernandez
B
AMENDED: March 25, 2011
HEARING DATE: April 13, 2011
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CONSULTANT:
2
Chan-Sawin
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SUBJECT
Health care coverage.
SUMMARY
Requires the board of the California Health Benefit
Exchange (Exchange) to develop a risk adjustment system for
health insurance products sold in and outside of the
Exchange in the individual and small group insurance
market, as specified.
CHANGES TO EXISTING LAW
Existing federal law:
Requires, under the federal Patient Protection and
Affordable Care Act (PPACA) (Public Law 111-148), as
amended by the Health Care Education and Reconciliation Act
of 2010 (Public Law 111-152), each state, by January 1,
2014, to establish an American Health Benefit Exchange that
makes qualified health insurance products available to
qualified individuals and qualified employers. If a state
does not establish an Exchange, the federal government
administers the Exchange.
Requires states to implement risk adjustment with regard to
health insurance products sold in the individual or small
group market, inside and outside of the Exchange, with the
Continued---
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exception of grandfathered plans.
Defines risk adjustment as the process by which:
The state assesses a charge on health care service
plans (health plans) and health insurers if the
actuarial risk of the enrollees of such plans or
coverage for a year is less than the average actuarial
risk of all enrollees in all health plans or insurance
coverage products in the state for the year.
The state provides a payment to health plans and
insurers if the actuarial risk of the enrollees of
such plans or coverage for a year is greater than the
average actuarial risk of all enrollees in all health
plans or insurance coverage products in the state for
the year.
Requires states to use criteria and methods established by
the federal Secretary of Health and Human Services when
carrying out risk adjustment activities.
Exempts grandfathered plans from risk adjustment. A
"grandfathered plan" is any group or individual health
insurance product that was in effect on March 23, 2010.
Existing state law:
Establishes the California Health Benefit Exchange within
state government, and specifies the duties and authority of
the Exchange.
This bill:
Requires the Exchange board, in collaboration with OSHPD,
CDI and DMHC, to develop a risk adjustment system for
health insurance products sold in and outside of the
Exchange, pursuant to federal law.
Requires the board to comply with criteria and methods
specified in PPACA, and subsequent regulations adopted
pursuant to that law.
Directs the board to consider various data collection
processes for the purposes of the risk adjustment system.
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Defines risk adjustment in accordance with PPACA.
FISCAL IMPACT
This bill has not been analyzed by a fiscal committee.
BACKGROUND AND DISCUSSION
According to the author, SB 728 implements a provision in
federal health reform that requires all states to risk
adjust across all individual and small group health
insurance products. Risk adjustment is a mechanism which
adjusts payments to health plans and insurers to reflect
the actual health status or recent medical experience of
enrollees. By equalizing risk and fostering productive
competition between plans and insurers - in other words,
removing the incentive for health plans and insurers to
compete by attracting healthier enrollees and discouraging
enrollment by less healthy enrollees - risk adjustment
ensures that plans have a financial incentive to serve all
populations.
The author argues that risk adjustment could create an
insurance market where plans and insurers compete to offer
better health care at lower cost, which is particularly
important in the context of building a successful state
health benefits exchange. For exchanges to function
effectively, the exchange must fairly adjust payments to
plans and insurers participating in the exchange based on
the health status of the members each plan or insurer
attracts. Otherwise, plans and insurers may shy away from
participating in the exchange because of concerns about
adverse selection, or may design their products to only
attract the healthiest people.
What is risk adjustment?
Risk adjustment is a statistical process used to identify
and adjust for variation in patient outcomes that stem from
differences in patient characteristics. It uses
patient-level information to calculate the expected health
expenditure, variation in health care spending, and
resource utilization of beneficiaries over a fixed interval
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of time, such as a month, half-year or year. Insurers use
risk adjustment to address adverse selection, which occurs
when less healthy and higher-cost individuals
disproportionately enroll in particular health insurance
products. Risk adjustment requires two steps:
1. The first step, risk assessment, involves
predicting the deviations of an individual's expected
health care costs from the costs of the average
enrollee, thereby assessing the relative risk of each
person in a group.
2. The second step in the risk-adjustment process is
payment or rate adjustment, which refers to
adjustments for uneven risk within health plans by
compensating plans and insurers for the amount of
actual risk they assume.
Risk adjustment methods use different types of data and a
variety of statistical models to calculate the relative
risk for a variety of conditions, how those interact with
age, gender and other diagnoses, and then predict resource
use. Such systems have been based on many factors,
including diagnoses, prior utilization of services, patient
demographics, presence of certain chronic diseases, and
patient's own assessments of health status.
Risk adjustment is commonly used in cost and quality
reporting to adjust health plan or insurer payments, health
care provider payments, or individual premiums. This
adjustment allows comparison of performance and quality
across providers and geographic regions, and is commonly
used by plans for strategic planning, budgeting, payment,
profiling, care management, and performance measurement.
Current risk adjustment systems are designed to fit current
health care systems, and calibrated to specific
populations. At present, no risk adjustment tool has been
established that take into account all populations.
Current models commonly use age or gender for risk
adjustment, but can be improved with better data.
Federal guidance on risk adjustment
In initial guidance to states on heath benefit exchanges,
the U.S. Health and Human Services Agency indicated that
additional federal guidance in 2011 will outline risk
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adjustment methods and require all health plans to report
demographic, diagnostic, and prescription drug data related
to their enrollees. The guidance further reiterates that,
as specified by PPACA, federal rules will apply risk
adjustment consistently to all plans in the individual and
small group markets, both inside and outside of Exchanges.
Further guidance addressing risk adjustment rules and
formulas will be provided in subsequent regulations, likely
in late 2011 and early 2012.
Existing risk adjustment efforts nationally and in
California
Risk adjustment is used by Medicare to adjust payments to
health plans participating in Medicare Advantage and
Medicare Part D prescription drug plans, and by state
Medicaid programs to adjust payments to health plans
covering Medicaid managed care members. Commercial
insurers also use risk adjustment payment systems to adjust
provider reimbursement. There are also emerging uses for
risk adjustment in new delivery models, including
accountable care organizations and patient-centered medical
homes.
California's Medicaid program, Medi-Cal, risk adjusts
capitation payments for Medi-Cal managed care plans, under
the two-plan and geographic managed care models to develop
county average capitation rates. Medi-Cal uses a risk
adjustment model specifically designed for Medicaid
programs using pharmacy data to classify individuals by
diagnosis categories in order to measure anticipated risk.
Pharmacy data was determined to be the most accurate and
complete source of claims-level information for the
Medi-Cal managed care program. Adjustments based on member
demographics (age and gender) are also made.
In 1995 and 1996, the California Managed Risk Medical
Insurance Board developed a risk-adjustment mechanism that
was applied to group health insurance plans selling to
small employers in the Health Insurance Plan of California
(HIPC), the first statewide health insurance purchasing
cooperative for small employers (those with 3 to 50
employees). The risk-adjustment mechanism was used by HIPC
in its 1996 and 1997 rate negotiations with participating
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health plans and insurers and was based on demographic
information (gender, family size, health condition, and
age), and also reflected the presence of higher-cost
diagnoses. When an insurer's aggregated risk varied more
than five percent from the average, funds were collected
and redistributed from the lowest risk plans to high risk
plans.
Related legislation
AB 52 (Feuer and Huffman), among other things, requires
health plans and insurers, effective January 1, 2012, to
apply for prior approval of proposed rate increases, under
specified conditions, including requiring plans and
insurers to disclose to their respective regulator whether
they have complied with all federal and state requirements
for pooling risk and requirements for participation in risk
adjustment programs in effect under federal and state law.
Set for hearing on April 26, 2011 in the Assembly Committee
on Health.
Prior legislation
SB 900 (Alquist), Chapter 659, Statutes of 2010,
established the California Health Benefit Exchange (the
Exchange) as an independent public entity within state
government, required the Exchange to be governed by a board
composed of the Secretary of California Health and Human
Services, or his or her designee, and four other members
appointed by the Governor and the Legislature who meet
specified criteria.
AB 1602 (J. Perez), Chapter 655, Statutes of 2010,
specified the powers and duties of the Exchange relative to
determining eligibility for enrollment in the Exchange and
arranging for coverage under qualified health plans,
required the Exchange to provide health plan products in
all five of the federal benefit levels (platinum, gold,
silver, bronze and catastrophic), required health plans
participating in the Exchange to sell at least one product
in all five benefit levels in the Exchange, required health
plans participating in the Exchange to sell their Exchange
products outside of the Exchange, and required health plans
that do not participate in the Exchange to sell at least
one standardized product designated by the Exchange in each
of the four levels of coverage, if the Exchange elects to
standardize products.
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COMMENTS
1.Timing. Although PPACA does not specify when the risk
adjustment requirements go into effect, the federal law
explicitly states that exchanges must be established by
2014, or the federal government shall administer an
exchange for states who have not established an exchange.
Risk adjustment systems typically run on a three year
cycle. For health plans and insurers to be able to write
policies in 2014, risk adjustment details will need to be
provided in 2013 to health plans and insurers in the state.
To meet this time frame, the risk adjustment system will
need to be developed in 2012. Beginning discussions as
early as possible on the creation of such risk adjustment
mechanisms is likely to the state's benefit, given the many
challenges created by the size of the state and the
diversity in its population.
POSITIONS
Support: Health Access
Oppose: None on file.
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